Gold Money versus the Monetary Ambitions of Governments

China's government follows a mercantilist trade
policy, meaning that it attempts to manipulate international trade -- via tariffs,
subsidies, regulations and exchange rates -- in order to maximise the amount
of money that flows into the country. This policy is unlikely to change anytime
soon. Also, China's government exerts very direct and stringent control over
its banking system, as evidenced by the rapid expansion of bank credit during
the first half of this year at the behest of the government, and the subsequent
slowing in the rate of credit expansion, again at the behest of the government.
Thanks to its domination of the banks, China's government has a level of control
over money supply that central-planners in the US and Europe can only dream
about.

Chinese policymakers will not willingly relinquish the influence they now
enjoy over the internal Yuan supply and the value of the Yuan relative to other
currencies. For this reason, the increasingly popular notion that China plans
to back the Yuan with gold, or link the Yuan's value to gold in some way, makes
no sense at all.

The probability that there will be some sort of official link between China's
currency and gold anytime soon is very close to zero, and the same can be said
about every other national currency. Unfortunately, the current major trend
is for increasing, not decreasing, government control over banking and money.

Another consideration is that it would be practically impossible for any single
country, with the exception of the US, to link its currency to gold, because
if all the other currencies remained free-floating/sinking then the exchange
rate of the gold-linked currency would experience wild swings in response to
changes in the US$ gold price. For example, a doubling of the US$ gold price
over 12 months followed by a one-third decline over the ensuing 12 months would
effectively cause the international prices of the gold-linked country's exports
to double and then plunge over a 2-year period. That is, international trade
could become extremely unstable for the lone country with the gold-linked currency.
The US is the exception because a large chunk of international trade is conducted
in US dollars. As a result, if the US were to link its currency to gold then
the rest of the world would be forced to follow suit. This means that the US
would have to be the first country to establish a gold link.

Many years into the future there will come a time when our present monetary
system is so ravaged by inflation that a complete system change will be unavoidable.
At this future time the reintroduction of an official monetary role for gold
could become a realistic possibility.

Rather than having a Gold Standard or some other official (government-mandated/controlled)
link between the currency and gold, the optimum solution would be for the government
to get out of the money business altogether and let the market use whatever
money it chooses to use. The trouble is, the optimum solution is so far outside
the realm of mainstream thinking that it won't even find its way to the discussion
table until after there is a total monetary collapse.